First Northern Community Bancorp — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. The company’s subsidiary, First Northern Bank of Dixon, is a California state-chartered community bank serving the Sacramento Valley region. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2017 / March 31, 2017 | Comparable period / prior year-end |
|---|---|---|
| Net income | $2.513 million | $1.731 million in Q1 2016 |
| Diluted EPS | $0.22 | $0.16 in Q1 2016 |
| Net interest income | $9.313 million | $8.301 million in Q1 2016 |
| Net interest margin | 3.42% | 3.34% in Q1 2016; 3.33% in Q4 2016 |
| Provision for loan losses | $0.600 million | $0.450 million in Q1 2016 |
| Total assets | $1.167 billion | $1.167 billion at December 31, 2016 |
| Net loans, including loans held for sale | $654.696 million | $673.096 million at December 31, 2016 |
| Available-for-sale investment securities | $293.443 million | $277.079 million at December 31, 2016 |
| Deposits | $1.061 billion | $1.064 billion at December 31, 2016 |
| Stockholders’ equity | $94.852 million | $92.298 million at December 31, 2016 |
| Cash and cash equivalents | $163.247 million | $159.643 million at December 31, 2016 |
Annualized return on average assets was 0.87%, versus 0.66% in Q1 2016; return on average common equity was 10.64%, versus 7.91%. The loan-to-deposit ratio was 61.7%, down from 63.3% at year-end. The filing reports no FHLB advances or other borrowing balances during either Q1 2017 or Q1 2016.
Cash flows: Operating activities provided $5.387 million, compared with $0.908 million used in Q1 2016. Investing activities provided $1.189 million, compared with $54.429 million used; financing activities used $2.972 million, compared with $10.817 million provided. Cash increased $3.604 million during the quarter.
Material changes and unusual items
- Net interest income increased 12.1% year over year. Management attributed the increase mainly to higher average loan and securities balances, improved loan yield, and lower deposit interest expense.
- Non-interest income rose to $2.845 million from $1.685 million, principally reflecting a $1.187 million pretax gain recognized on a real-estate sale-leaseback. The transaction generated a total gain of $1.682 million; $0.495 million was deferred and will reduce occupancy expense over the six-year initial lease term.
- Non-interest expense increased to $7.503 million from $6.819 million, driven mainly by salaries and benefits, data processing, and other expenses.
- Loans net of the allowance declined from year-end, while investment securities increased. Management attributed the loan decline primarily to lower demand across several commercial, agricultural, construction, and consumer categories, partly offset by growth in residential mortgages.
- The company declared a 4% stock dividend, payable March 31, 2017. Per-share figures were adjusted retroactively for the dividend.
Credit quality, liquidity, capital, and risks
- The allowance for loan losses was $11.499 million, or 1.73% of total loans, compared with $10.899 million, or 1.60%, at year-end. Q1 net charge-offs were zero; the provision increased as reserves on individually evaluated loans and qualitative risk factors rose.
- Non-accrual loans were $6.182 million gross and $4.104 million net of government guarantees, down from $6.297 million and $4.216 million, respectively. One $5 million commercial loan represented 81% of gross non-accrual loans and had a partial government guarantee. There were no loans 90 days or more past due and still accruing, and no other real estate owned.
- Troubled debt restructurings totaled $9.584 million; no loans were newly modified as TDRs in Q1 2017. The filing states there were no additional lending commitments to non-accrual borrowers or existing TDR borrowers.
- Credit remains concentrated in real estate: approximately 76% of loans, excluding loans held for sale, were real-estate-related, with collateral located in Northern California. Risks include regional economic weakness, lower collateral values, commercial property vacancies, construction issues, and agricultural conditions such as drought or flooding.
- Liquidity sources included $77 million in unsecured bank lines and FHLB borrowing capacity of $272.876 million, subject to collateral requirements. The Bank’s reported capital ratios exceeded well-capitalized requirements: leverage 8.15%, Common Equity Tier 1 12.15%, Tier 1 risk-based 12.15%, and total risk-based 13.40%.
- Off-balance-sheet commitments totaled $232.203 million, including $227.127 million of undisbursed loan commitments, $3.066 million of standby letters of credit, and $2.010 million of commitments to sell loans. These amounts are contractual exposures, not necessarily expected cash outflows.
- Management identified no material change in market-risk disclosures and concluded disclosure controls were effective. The company reported no material pending legal proceedings and no material changes in internal control over financial reporting during the quarter.
Outlook: The filing provides no specific earnings, revenue, or margin guidance. Management cautions that forward-looking statements are uncertain and identifies interest rates, competition, regulation, credit quality, regional economic conditions, real-estate values, deposit volatility, liquidity, and cybersecurity among relevant risks. Its forward-looking discussion also references expectations of no cash dividend in the foreseeable future.
Important facts for investors to verify
- Whether earnings growth persists without the one-time sale-leaseback gain; review underlying operating income and expenses.
- Developments in the $5 million non-accrual commercial loan, its guarantor and government guarantee, and the adequacy of the allowance for loan losses.
- Trends in loan demand, real-estate concentration, criticized and classified credits, and TDR performance.
- Deposit stability and the availability and collateral requirements of the stated borrowing facilities.
- The effects of interest-rate changes on net interest margin, securities values, and deposit costs, as well as the deferred sale-leaseback gain’s future expense benefit.